Shree Renuka Sugars Limited Brazilian subsidiaries results for Quarter ended 30 th June 2012 Conference Call Transcript October 04 th, 2012

Transcription

1 Shree Renuka Sugars Limited Brazilian subsidiaries results for Quarter ended 30 th June 2012 Conference Call Transcript October 04 th, 2012 Ladies and gentlemen, Good day and welcome to the conference call on Q1 FY13 results for Brazilian subsidiaries of Shree Renuka Sugars Limited. We have with us today Mr. Vice Chairman and Managing Director; Mr. K. K. Kumbhat Chief Financial Officer; Mr. Head, International Operations. As a reminder, for the duration of the call, all participants lines will be in listen-only mode and there will be an opportunity for you to ask questions at the end of today s presentation. Should you need assistance during this call, please signal an operator by pressing * and then 0 on your touchtone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr.. Thank you and over to you, Sir. Good evening friends. Thanks for dialling in again for results for quarter ended 30 th June 2012 of our Brazilian Subsidiaries. We hadn t declared these results along with our stand-alone results on the 14th of August. This quarter has been a muted quarter in terms of production, mainly due to heavy rain in the months of May and June when more than half of the operating time was lost. We have achieved an EBITDA of Rs. 700 million in Renuka do Brasil and Rs. 583 million in Renuka Vale do Ivai for the quarter ended 30 th June The cane crushed was about 1.91 million tons between the two companies which is about 20% of the estimated cane target for this season. Since July, we have had much better weather in Brazil. In general the weather in Brazil this year has been normal on the whole and the best weather in the last three years. Crushing is now in full swing and we have more or less caught up with the difference that was evident in June between cane crushed this season against last season. We hope that we will meet our target of about 9.6 million tons of crushing during the current ongoing season in Brazil. The world raw sugar price has gone lower given the impending surplus in the world market. However, it has seen strong support below 20 cents/lb and it is currently trading at around 21 cents/lb. This has happened because the large part of the surplus in the current Brazilian season was delivered on the futures exchange when the October contract closed last Friday. We expect better prices going forward. We also do not see any exports from India in the next two seasons and that should be supportive of the world price. 1

2 On the commercial side an important feature is the resumption of strong exports of ethanol from Brazil to the United States given the shortage of ethanol there. So also is the approval of a new track of Advanced Bio Fuel Standard, where sugarcane ethanol qualifies under their prescribed criteria of green bio fuel while corn-based ethanol does not. Current year s quota for the category of Advanced Bio fuel opened up by the US government for sugar cane based ethanol is about 2.4 billion litres and this will increase by 50% to 3.6 billion litres in There continues to be a difference in the performance of Renuka do Brasil and Renuka Vale do Ivai. One of the big reasons for that is the productivity of the agriculture land. Agriculture yield for the season up to 30 th September was 67 tons/ha in Renuka do Brasil and 79 tons/ha in Renuka Vale do Ivai. That is the main reason for the difference in the margin. As, we rebuild our cane plantations in Renuka do Brasil, we expect this gap to keep closing. With these few remarks, I will throw the floor open for questions. Thank you very much. We have our first question from the line of Girish Achhipalia from Morgan Stanley. Please go ahead. Girish Achhipalia Valor came out with a report couple of days back talking about the potential merger between yourself and ETH. Just wanted your sense of what is this transaction all about? And secondly just wanted to understand the implications of the government notification which talks about the potential levy obligations on all the imported raw sugar that refineries are importing currently? As regards to your first question, there is nothing firm that is worth to be shared. In general, Renuka is open to discussions and there are a lot of ideas floating round in Brazil at the moment. However, this particular report, in our opinion, was speculative and therefore does not need any comment beyond that. As far as your question on the Indian side, it is always been the case that if you have imported raw sugar and processed it in India to sell in the domestic market, there will be a levy component. The question is what the levy price on imported sugar will be, because levy price is determined based on cost. We therefore do not anticipate any additional burden from furnishing of levy on anything that is imported. 2

3 Girish Achhipalia This levy price that you have to sell to the government, wouldn t that price be different from levy for domestic sugar? In fact this statute has never been used in the past. So it is unclear how the cost would be determined. The next question is from the line of Nirav Shah from Antique Stock Broking. Please go ahead. Nirav Shah What are the debt repayment obligations for both RVdI and RdB for FY2013 and 14? In Renuka Vale do Ivai, the moratorium period has just ended in September 2012 and we have just started the repayment. I would ask Mr. Gautam to provide you with the debt details. In Renuka Vale do Ivai the repayment for this year ending March, 2013 is roughly about USD 30 million. For Renuka do Brasil there is a repayment of about USD 50 million by March Nirav Shah And debt repayment in FY14? We start our repayment from September 2013 for Renuka do Brasil after their moratorium period. So the total repayment would be about USD 100 million in Renuka do Brasil for FY14 and about USD 40 million for Renuka Vale do Ivai. Nirav Shah Can you just repeat the repayment for FY13 for Renuka do Brasil? It is about USD 50 million. 3

4 Nirav Shah Can you give me a break-up of our total leased area under cultivation? Can you give us the break-up between RDB and RVdI for both 2013 plantation which you have completed and 2013? For Renuka do Brasil the plan was to plant 20,000 hectares and we have already done 10,000 hectares out of that. For Renuka Vale do Ivai the plan was 3,500 hectares and we have done about 1,700 hectares of that. Nirav Shah Is this for the next season? This is for the current year planting for cane to be available next season. Nirav Shah Can you provide the total land under cultivation? The total amount of land that we have in RdB is about 78,000 hectares and 30,000 hectares in RVdI. Thank you. The next question is from the line of Sanjay Satapathy from Merrill Lynch. Please go ahead. Sanjay Satapathy You explained that the difference in the margin between RdB and RVdI is because of the difference in the agriculture yield and capacity utilization between those two companies. We have also noticed that the average selling price of the sugar is also very different between the two entities. Can you just tell us, why the prices are so different between the two companies? Yes, there is a difference in the price of about 1.5 cents/lb. This is basically because while our overall hedge ratio is about 50% at 24 cents/lb, higher percentage of sugar was hedged in RVdI compared to RdB. Given the production setback we had last year in RdB, from a risk perspective, we have been a bit more 4

5 cautious. So in the quarter ended June 2012, we have actually shipped out more sugar priced at the spot price from RdB compared to RVdI. Sanjay Satapathy During the June quarter, what was the capacity utilization in terms of cane crushing in RdB and RVdI? On a day with clear weather, both are running at more than 90% of the installed daily capacity. Sanjay Satapathy I am asking about April to June period because what I see is that the raw material to sales ratio for RdB is at about 47% while for RVdI it is at 52%. But the difference in other costs as a percentage of sales is much higher between the two companies. So, just wanted to know how much of the difference is because of the difference in utilization and how much is because of probably higher level of inefficiency between RdB and RVdI? RdB is more mechanized and has higher fixed costs. But in last quarter, RVdI suffered more in terms of days lost due to rain than RdB. So that probably accounts for this difference you are noticing. Thank you sir. We are going to take our next question. It is from from JM Financial. Please go ahead. On the debt front, just wanted to know how much is repayable for the stand-alone entity i.e the Indian Company? K. K. Kumbhat The total amount repayable for the standalone Business in India up to 31 st March 2013 is expected to be about Rs. 275 Crores. And for FY14? 5

6 KK Kumbhat Repayment for FY 2014 would be about Rs. 300 Crores. Would you be able to help with the debt numbers as on 30 th June, consolidated as well as the break-up between RVdI and RdB? The total debt in Brazilian subsidiaries is about Rs. 5,119 crores. You mentioned that we are looking at a 9.6 million tons target of crushing. Just wanted to know what is the break up and do you see any upside risk given the favourable weather conditions over there? We are currently holding on to our last estimate which is about 7.1 million for RdB and 2.5 million for RVdI for the current season because there is a forecast of increased rain towards the end of November. As we said earlier, the productivity so far has been 67 tons/ha against our earlier estimate of 63 tons/ha. But we are a bit conservative on the number of days we will have for crushing in the season and there could be a small volume of cane left over which we could crush early next year. We should start in April rather than in May in the next season. Would you be able to throw some light on the hedging status? How much is already hedged and at what price? Of the sugar that is remaining, we have about 50% hedged at 24 cents/lb but at a lower exchange rate. So at today s exchange rate of 2.02 BRL/USD, that would translate into 22 cents/lb. The current market price is about 21 cents/lb. You said that 50% is hedged. Do you mean, 50% of whatever sugar we produce out of the remaining of the 9.6 million tons of cane crushed during the season is hedged? 6

7 Yes. My last question is on the refinery. I guess you have given a remark in the earnings release that you are expecting better utilization of refineries in the second half. Just wanted to get a sense as to what is the strategy behind the refineries? Is it that you hedge both the raw materials and finished goods or you just hedge only one, say the raw material or the finished goods and take a risk on the margin? When we are refining for the world market, typically we hedge the margins, which means we hedge both the raw sugar and white sugar. Or we price the raw sugar at a later stage when we sell the white sugar physically into various neighbouring countries. Effectively we do not run any open positions on the refineries, long or short, while operating in the world market. And in terms of the margin guidance, would you be able to throw some light on what is your current spread and what margins can you make on that? Currently the world refining margin, the white premium, is being driven by the fact that there is no Thai sugar from the previous season. The new crop will be available after January and there are also no Indian exports. Indian exports will end at around 3.4 million tons of sugar for the season upto September 30 th From this month onwards, we don t see any Indian exports. Roughly on an EBITDA basis, one should take the white premium to be about USD 40 per ton right now. Thank you. The next question is from the line of Girish Achhipalia from Morgan Stanley. Please go ahead. Girish Achhipalia Firstly on the production in India; as we see it right now, what is the current picture looking like? 7

8 Yesterday, the Government had their first estimate in their meeting with the Cane Commissioners of various important sugar producing states and as per the Food Minister s statement last night the estimate is now 23 million tons. It is 1 million ton lower than ISMA s last month estimate of 24 million tons. This includes an estimate of 6.3 million tons from Maharashtra. Our own view, being present in Maharashtra as well as Karnataka, is that the crop will be lower than that and yesterday the Maharashtra Sakhar Sangh has made a statement in Mumbai that the crop could be around 5.5 million tons. The reason for this continuous deterioration in the crop estimate in this part of the country is because in more than 50% of the cane fields, the irrigation water required to sustain the cane in the winter is not sufficient. Cane fields irrigated by ground water are the most affected and therefore the final number for sugar estimate in Maharashtra could be lower than 6 million tons. I think official as well as industry association numbers are moving down slowly because people have been cautious to cut estimates. We think we are in a very tight situation. The current domestic price is controlled only because the government has actually released almost 95% of the non-levy stocks which stood at 42 lakh tons as on 1st October. Out of that, 40 lakh tons has been released into the market for October and November and that is what is holding the price at the moment. Given the fact that the current weather and water conditions in the western part of India as well as Tamil Nadu are not conducive for cane planting for the next season, I expect upside in the domestic prices somewhere between now and February depending on how the monthly releases are given. But it is very hard to foresee how we can repeat even the current crop size in Girish Achhipalia Sir, just to take it slightly forward. What is the estimate of inventory that we will have as opening? And secondly, what is Renuka s crushing target for the next year? And finally if you had to just talk about what the cane price is likely to be because I assume that the farmer in Maharashtra has not got a fair deal even last year as there are a lot of middlemen who made money. So what s the potential arrears build up that may happen or the cane price hike that they may seek this year? First in terms of our own production, we expect it to be down by about 20% over the last year. We crushed about 4.9 million tons of cane in the last season. This year we should be at around 4 million tons. As far as the cane price is concerned, in fact, the reality is opposite of what you stated. Maharashtra has actually got the highest price last year. The cane price was Rs. 2,500 per ton of cane. You must remember that the average productivity in Maharashtra is 85 tons/ha. In terms of farm income, this is the best part of the country to grow sugarcane. Sugar prices here move along with the market, so we typically have a fixed 8

9 EBITDA margin which is about 15% to 18% irrespective of where we are in the cycle. Given the sugar prices are up over the last season by about Rs. 7/kg, we expect the current year cane price to end up at something like Rs. 3,000 per ton of cane and that would be again in line with the increase in sugar price so actually in rupee terms we expect the EBITDA margin to rise by Re 1/kg and be about Rs. 5/kg because in percentage terms it should be the same. On the sugar inventory there has been some assessment online. Online data with the Ministry seems to indicate that India had about 4.2 million tons of non-levy sugar on the 1st of October and about 1.6 million tons of levy sugar on the same date. So that would be about 5.8 million tons. This implies, working backwards, that the demand last year for the domestic market was about 22 million tons. So even if you forecast a small increase this year in demand, you would come to a figure close to 23 million tons. As you can see, production estimates are shrinking rapidly below that number. Girish Achhipalia What according to you is the domestic raw sugar market that we have in India, I mean, in terms of volumes if you could just quantify? There is no domestic raw sugar market. Raw sugar is not a food product so it cannot be traded in the domestic market. Girish Achhipalia Sir last year you were procuring a lot of raw sugar for your refining operations. I believe you had some domestic raw sugar off take from that was happening. Is that a very small number? That is a flexible production. Last year mills produced raw sugar because the price that we were able to pay for raw sugar for conversion and export to the world market was higher than the domestic price, mainly because the domestic price was at 20% discount to the world price. Today the domestic price is at 25% premium to the world price, so these mills that were producing raw sugar last year would actually produce white sugar. They can do both. For us it is much cheaper this year to refine raw sugar sourced from Brazil and that s what we are doing at the moment. Thank you. The next question is from the line of Sanjay Manyal from ICICI Direct. Please go ahead. 9

10 Sanjay Manyal We had one news that raw sugar has been imported in India to the tune of 4.5 lakh tons and I think Renuka has done some amount of import in that as well. So can you just quantify that? Going forward for the next two quarters we expect to run both our refineries at full capacity. As of now our margins for re-export are better. There is a 10% import duty for sale into India. So, we can do both. Currently margins for exports are better and there is very good demand for refined sugar in the Asian region given that there are no white sugar exports happening from India at the moment. This is the current outlook. There is definitely raw sugar coming to both our refineries. At the moment it is not destined for the domestic market. Sanjay Manyal Sir, can you quantify that number. What kind of number you would be refining this year? Well we have our full capacity of 5,000 tons per day between our two port based refineries and we hope to run them at close to full capacity next two quarters. Thank you. This concludes our Questions and Answer session. I would now like to go back to Mr. for closing comments. Over to you, Sir. I thank everyone for your continued interest and have a good day. Thank you. On behalf of Shree Renuka Sugars Limited that concludes this conference. Thank you for joining us. 10

11 Analyst/ Investor/Media Enquiries: Vishesh Kathuria For further information on Shree Renuka Sugars visit Safe Harbour This release contains statements that contain forward looking statements including, but without limitation, statements relating to the implementation of strategic initiatives, and other statements relating to Shree Renuka s future business developments and economic performance. While these forward looking statements indicate our assessment and future expectations concerning the development of our business, a number of risks, uncertainties and other unknown factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to, general market, macro-economic, governmental and regulatory trends, movements in currency exchange and interest rates, competitive pressures, technological developments, changes in the financial conditions of third parties dealing with us, legislative developments, and other key factors that could affect our business and financial performance. Shree Renuka undertakes no obligation to publicly revise any forward looking statements to reflect future / likely events or circumstances. 11